If oil hits $200, globalization becomes localization, author says

Globalization, basically international trade and the transfer of jobs to lower-cost centers, shifted into fifth gear during the recent economic expansion, with record hemisphere-to-hemisphere business.

Moreover, while economists expect trade to rev-up again as the global economic recovery starts, one economist is arguing that globalization's second wave will be short. Author Jeff Rubin, former chief economist for CIBC World Markets in Toronto, expects oil prices to hit $200 per barrel in the next economic expansion, throwing globalization into reverse, and sparking a re-birth of 'localization,' or locally-produced goods.

Investors should not casually dismiss Rubin. He accurately predicted that oil would hit $50 per barrel in 2005 and $100 in 2007. Further, Rubin does not believe the bulk of oil's record run to $147.27 in the summer of 2008 was the result of excess leverage or turbo-charged hedge funds in search of return, but stemmed from the inability of global oil supply increases to keep pace with rising global demand. Oil fell 31 cents Tuesday at mid-day to $67.19 per barrel.

Further, the current U.S. and global recessions, as investors might sense, have only created a temporary reprieve from sky-high oil prices, Rubin argues. And it's those future sky-high oil prices that are about to make your world a whole lot smaller, he theorizes. Basically, Rubin contends that the global economy requires cheap oil: it's what makes it profitable to ship raw materials to China to have them processed into cheap electronics products, clothes, furniture, and much of what else consumers buy. With cheap oil, low-wage countries have a competitive advantage. Enter $100, $150, and then $200 per barrel oil and developed economies with higher-wage employees become competitive again, Rubin argues.

"Many of those high-paying manufacturing jobs that we thought we had lost forever to cheap labor markets overseas may be soon coming back home," Rubin writes. Here's one example: steel made in the United States became cheaper than steel imported from China in 2007 -- the first time that's happened in more than 10 years.

A brand new dance: the local-motion

Economist Peter Dawson, whose specializations include energy, agrees with Rubin that persistent $150-plus oil prices would throw globalization into reverse for many products and services, but he's not in total agreement about the economic and public/private policy responses to those oil prices.

"Without question, oil at $200 would lead to localization taking away from global trade. It simply would cost too much to manufacturer many products and ship them half way around the world. Clothes would be one consumer item that would return to the U.S., as would light manufacturing," Dawson said. "And needless to say it would lead to massive adjustments in spatial geography and urban planning. Most everyone would start to live closer to work, or choose work locations closer to home, where possible."

"Where I disagree with Rubin is in the underplaying of innovation, conservation, and energy substitutes," Dawson said. "At sustained oil prices above $100 per barrel, the push, already on for substitutes, will intensify, as will the push for highly efficient transportation, from cars, to buses, to ocean-traveling container ships."

For the reasons of conservation and energy substitution, Dawson sees high oil prices shifting some production back to higher-cost zones such as the United States and European Union, "but not the end of globalization, of lower-cost production centers." Development of emerging economies would continue, Dawson said, with considerable job transfer to lower-cost centers.

Rubin addresses both the conservation and alternate fuels variables in his book, but argues that they won't be enough to avoid 'Oil Shock IV,' to go along with the shocks of 1973-74, 1979-80, 2007-8. Oil supply increases will not be able to keep pace with rising demand for oil in emerging markets, particularly in China, India, and Latin America.

Oil / Economic Analysis: Put Rubin firmly in the camp that argues that energy from oil will present a price/cost problem for most petroleum consuming nations. Further, how unreasonable is Rubin's prediction of $200 oil? At the start of the decade, it would have been categorized as 'a near-fringe' analysis. But after last year's $147 high, and oil's ability to vault 100% in less than six months - a macroeconomic eye-blink - to $72 from $36, its plausible to see oil prices well above $100 during the next global economic expansion. Add geopolitical risk (primarily in Iraq, Nigeria, Venezuela, and Iran) and one can construct a scenario of a world with sustained oil prices above $150. That would push average U.S. gasoline prices well over $4 per gallon nationally, with heating oil well over $3.50, propelling a series of consumer, residential, and commercial changes.

The key critique of Rubin's argument concerns the role that increased fuel efficiency and energy substitutes will play once oil reaches sustained prices above $100, then $150. Rubin argues they won't change the localization trend, whereas economist Dawson and I differ, but we both still recommend Rubin's book, as it walks investors/readers through the consequences for the nation, if it does not follow-through on its current public policy trend to become more energy efficient and less dependent on oil.